Bonuses necessary to keep most valuable employees

Sep. 9, 2012 - 02:28PM
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The U.S. Olympic Committee pays a $25,000 bonus to a gold medalist, $15,000 for silver and $10,000 for bronze. Professional sports contracts are laden with cash incentives. Best performers win Academy Awards and other recognition. America celebrates achievements.

In business, cash incentives are universal with executives and managers and close to universal in sales. In many jobs, tips are important. Profit-sharing plans, goal-sharing plans and piece-rate incentives are widely used.

Rewards influence employee behavior. The prospect of rewards — when effectively managed — triggers better performance. Yes, incentives can trigger undesirable consequences, but that’s poor planning. Enron is an obvious example. The problems in the financial community are attributable in part to poorly planned incentives. Corporate executives are sometimes rewarded for what appears to be poor performance.

But the evidence is solid — incentives can raise performance levels.

Studies show incentives based on financial measures generate gains of $3 to $4 for every dollar paid to employees.

Recent media reports highlighted the misuse of bonuses. But regardless of past problems, financial rewards should play a role in the management of federal agencies. People want to be recognized for their achievements; federal employees are no different. The evidence: Pass-fail performance rating systems have always been unpopular. Agencies need effective practices to recognize and reward the best performers. With solid management, bonuses will contribute to better performance.

The amounts do not have to be large. Sometimes even silly awards can be powerful incentives. Years ago, the popular book “In Search of Excellence,” by Thomas Peters and Robert Waterman, had a story about a golden banana used as an award. Carved from wood and painted gold, it was highly coveted and the highlight of an annual awards ceremony.

Companies budget for incentive awards. They are not paid out of leftover funds. Awards are planned as part of total compensation. The words “target” or “guideline,” expressed as a percentage of salary, are used in planning and budgeting. There is a commitment to reward performance.

Government is, of course, not the same as the business world. Bonuses will always be low by comparison, but then expectations are lower. Awards are in some ways symbolic; they send a message that management recognizes the employee’s achievements. If awards are limited to the best performers, a budget as small as 1 percent of payroll can produce meaningful rewards.

Agencies have mismanaged bonuses — the most high-profile recent example being the General Services Administration. When agencies award bonuses, there are often claims of discrimination and bias. News reports create the impression that awards are paid to far more employees in some agencies than others. The perception that awards are not fairly managed undermines their motivational impact. Agencies need to do better.

Two psychological theories apply to the impact of bonuses. First, equity theory argues employees value fair treatment and act to balance their work efforts and rewards. In other words, the best performers are likely to reduce their efforts or quit if their achievements are not recognized.

The second, expectancy theory, argues that employees are confronted with tradeoffs and make choices based on what they value and expect. For example, an employee is unlikely to work long hours if his or her spouse complains. If employees do not know what’s expected, their effort will be less.

The media reports and anecdotal evidence suggest federal bonus practices are weak on both counts. Awards are too often made after the fact, so employees cannot anticipate them. In business, awards are typically linked explicitly to measurable goals; employees know what’s expected and what they can expect.

A guaranteed winner in an era of belt tightening would be a plan to share a percentage of savings with employees balanced with improved performance.

Eliminating bonuses will adversely affect the commitment of the most valuable employees. That cost will be greater than the small amounts saved. Agencies need the contributions of valuable employees now more than ever.

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Howard Risher is a consultant and writer on federal pay and performance issues. He was the managing consultant for the studies leading to the 1990 Federal Employees Pay Comparability Act and is author of “Planning Wage and Salary Programs.”